Is a Chapter 13 Bankruptcy Right for Me?
Distraught women at desk

Many business owners and wage earners are currently thinking about filing a personal bankruptcy.

In this economic climate, individuals owe money to their creditors for items such as personal guarantees on business loans, credit card debt, medical bills, marital debt, and other types of debt.  A personal bankruptcy can wipe out, or “discharge” certain types of claims.  The two most common types of personal bankruptcy are a Chapter 7 bankruptcy, known as a “liquidation,” and a Chapter 13 bankruptcy, known as a “reorganization.”

Chapter 7 bankruptcy is one where a trustee liquidates any non-exempt (or unprotected) assets, and the person filing bankruptcy, the “debtor,” receives a discharge.  Our prior article discussed what debts are included and not included in a Chapter 7 discharge.  Here, we discuss the advantages of filing a Chapter 13 bankruptcy, including, most importantly, what types of debts can be discharged in a Chapter 13 bankruptcy that cannot be discharged in a Chapter 7 bankruptcy.

Some of the advantages of filing a Chapter 13 bankruptcy include:

Retention of assets:

When a debtor owns assets that have a value greater than the amounts allowable under state law, a Chapter 13 bankruptcy can allow debtors to retain those assets, instead of having to relinquish control of them to a bankruptcy trustee.

Saving homes:

A Chapter 13 bankruptcy can provide an opportunity for a debtor to cure mortgage arrears and prevent foreclosure.

High-income filers:

Sometimes, high-income filers are prevented from filing under Chapter 7, due to what is called the “means test,” which considers a debtor’s income during the six months prior to the bankruptcy filing.  Filers who are precluded from filing a Chapter 7 bankruptcy under the “means test” may still be eligible to file under Chapter 13.

Ability to pay nominal amounts to creditors:

A misnomer regarding Chapter 13 is that a debtor must repay all of his or her debt.  This is not always the case and, in fact, is usually not the case.  The payment plan, which is typically over three to five years, is determined by a debtor’s assets and income.  A debtor with valuable assets or a high income will typically pay more than a debtor with few assets or a low income.  Even if a debtor with few assets or a low income has substantial debt, that debtor may not be required to repay all of his or her debt, and still qualify, at the conclusion of the payment plan, to receive a discharge.

Ability to discharge certain debts that are non-dischargeable in Chapter 7: This advantage can be extremely valuable to certain debtors and requires further explanation.

Take, for example, William.  William was involved in a business deal that resulted in a lawsuit being filed against him.  In addition to this,he owes penalties to the federal government for back taxes. He also owes money to his ex-spouse as part of a property distribution award.  Even worse, the lawsuit against William involves an allegation that he “willfully and maliciously” injured the property of the opposing party when he sold assets subject to a lien.  He also has credit card debt and medical bills.  William, in short, is a mess. If he files a Chapter 7 bankruptcy, much of this debt is likely to be deemed non-dischargeable, meaning that those debts will survive his bankruptcy.

However, if William files a Chapter 13 bankruptcy, he may be able to discharge certain of these debts, including:

Debts arising out of willfully and maliciously damaged property:

If it can be proved that a debtor willfully and maliciously injured another party, or the property of that other party, then the resulting debt will not be discharged in a Chapter 7 bankruptcy.  In a Chapter 7 case, the creditor making this accusation must file a lawsuit within the bankruptcy to determine that the debt falls under this classification.  However, this is not the case in a Chapter 13 bankruptcy in which even claims involving allegations of willful or malicious injury can be discharged.

Certain marital debts:

Similarly, while alimony and child support are never dischargeable in any type of bankruptcy proceeding, property settlements, equitable distributions and other types of marital debts that are not domestic support obligations can be discharged in Chapter 13.

Fines and penalties owed to the government:

In addition, certain fines and penalties owed to the government can be discharged in Chapter 13, when they cannot be discharged in Chapter 7.  This would include certain tax penalties owed to the government.  While taxes and interest are not dischargeable, the penalties can be.

Debts not discharged in prior bankruptcy:

If a debtor filed for bankruptcy previously, and their discharge was denied, that debtor cannot eliminate those same debts in a subsequent Chapter 7 case but can do so in a subsequent Chapter 13 case.

Debt incurred to pay taxes:

If a debtor used their credit card to pay off a non-dischargeable tax obligation, such as recent income tax debt, that debtor cannot eliminate those charges in a Chapter 7 case but can do so in a Chapter 13 case.

For these reasons, a Chapter 13 bankruptcy filing may prove to be more advantageous to William than a Chapter 7 bankruptcy.  William will likely be able to discharge any debt arising from the business litigation, the penalties associated with his tax liability, and his marital debt relating to the property settlement with his ex-wife.  In addition, as in a Chapter 7 bankruptcy, his credit card debt and medical bills can also be discharged.

William should confer with his bankruptcy attorney to better understand which debts are and are not dischargeable in a Chapter 13 bankruptcy.  Chapter 13 is a complicated procedure, but the potential advantages of such a personal bankruptcy could well enable William to obtain the fresh start he so  desperately needs.

Related content:

All Good Things Come To An End (Part I):  Someone Breaches Their Contract With You

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